Assume that a government is considering a new social program and may choose to include in this program one of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table below. Suppose that the government chooses to do project C What is the total cost and total benefit of doing project C?

Question

Assume that a government is considering a new social program and may choose to include in this program one of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table below.  Suppose that the government chooses to do project C What is the total cost and total benefit of doing project C?

Quizplus · Accepted Answer

The best choice is to do project C since its marginal benefit exceeds its marginal cost by the greatest amount. The total cost of project C is $9 billion, which is the sum of its marginal cost and the marginal cost of project B ($2 billion). The total benefit of project C is $12 billion, which is the sum of its marginal benefit and the marginal benefit of project B ($5 billion). Therefore, the net gain from doing project C is $3 billion ($12 billion - $9 billion). The net gains from doing projects A, B, and D are $1 billion, $2 billion, and $2 billion, respectively.

Assume That a Government Is Considering a New Social Program